Machinery orders drop 9.1% in April after sales tax hike

Core private-sector machinery orders plunged a seasonally adjusted 9.1 percent in April compared with the previous month, with the first consumption tax hike in 17 years blurring the economic outlook, the government said Thursday.

Core orders, excluding those for ships and from utilities because of their volatility, fell for the first time in two months to ¥851.3 billion, following record growth of 19.1 percent in March, the Cabinet Office said.

Total orders, including those from the domestic public sector and abroad, surged 34.8 percent to ¥3.13 trillion, the highest since comparable data started being compiled in April 2005, due to big orders exceeding ¥10 billion, the office said.

The Abe administration left intact its basic assessment of core machinery orders, widely regarded as a leading indicator of capital spending, saying they are “on a growth trend.”

Business investment, which Prime Minister Shinzo Abe views as a pillar of economic growth, is unlikely to rapidly increase amid fears that the April 1 sales tax hike to 8 percent could hurt personal spending and production, dragging down the economy, some analysts said.

“The possibility cannot be ruled out that the speed of economic recovery will slow” as wages have not grown fast enough to ease the negative impact of the tax hike, said Takeshi Minami, chief economist at the Norinchukin Research Institute.

If the economy stalls, “expansion of capital spending would level off,” he added.

But Koya Miyamae, senior economist of SMBC Nikko Securities Inc., said the 9.1 percent slide in machinery orders in April was better than the market’s expectations for a 10.8 percent drop, suggesting business investment may not languish ahead.

Indeed, the Finance Ministry and Cabinet Office said in a joint survey released Wednesday that large firms in all industries plan to raise their capital spending by 4.5 percent in the year through next March.

Last week, the government-affiliated Japan Center for Economic Research said gross domestic product is forecast to contract by an annualized 4.2 percent in real terms in the April-June quarter, citing the average projection of 41 economists.

The Bank of Japan and the administration, however, have said that the economic slowdown triggered by the tax hike is expected to be short-lived and that the economy is likely to return to a moderate recovery track soon.

In April, orders from the manufacturing sector fell 9.4 percent from the previous month to ¥348.4 billion, while those from nonmanufacturers rose 0.9 percent to ¥519.5 billion.